Many central banks around the world are launching or considering a central bank digital currency (CBDC). How can technology providers support them on their journey?
- A number of countries are developing CBDCs and some have already implemented them.
- Central banks have a number of policy decisions to make when designing a CBDC.
- To make the transition from the design of a CBDC to execution, an experienced technology partner with an understanding of the global financial markets is essential.
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According to a recent report by PwC, 80 percent of the world’s central banks are considering, or have already launched, a CBDC.
Individual countries have varying degrees of sophistication and maturity, but motivating factors in the development of CBDCs typically include financial inclusion, the facilitating of cross-border payments and the reduction of financial crime.
Considerations for a central bank digital currency
Central banks looking to issue a CBDC have several factors to consider, such as who should be given access to the currency and whether it should be interest-bearing.
Interoperability between the CBDC and the country’s fiat currency is crucial, as is a guarantee of at-par convertibility between the fiat and digital currencies.
Deciding on matters of policy is just one part of the CBDC developmental journey for central banks and ministries of finance.
In order successfully to implement an interoperable CBDC, it is essential that a central bank has the technology in place to adapt to changes and ensure the smooth, efficient and transparent functioning of the financial markets under its jurisdiction.
Meeting and maintaining standards
In October 2021 the G7 made a statement that any digital currency issued by a central bank must “support and do no harm” to the bank’s ability to fulfil its mandate on monetary and financial stability, and must also meet rigorous standards.
The statement emphasises the importance of transparency, resilience and cross-border interoperability as well as a shared responsibility among central banks “to minimise harmful spillovers to the international monetary and financial system”.
Policy-making is the role of a central bank, but these standards cannot be met by policy alone.
Technology and evolving markets
Issuing a CBDC will impact banks and other financial institutions under the jurisdiction of a central bank.
Most central banks have yet to decide how to adapt their existing infrastructures to CBDCs and to understand how the fiat and CBDC infrastructures will then integrate successfully.
Since technology is rarely within the realm of expertise of a central bank, a strong partnership with a technology firm that has a deep understanding of local and global financial markets is needed in order to understand how existing technology will need to adapt and change.
The right technology partner can support the central bank on its developmental journey, ensuring that robust markets are maintained and implementing trusted and proven solutions at each stage of the trade lifecycle.
How can central banks automate this process?
More and more central banks are automating processes across primary and secondary markets. Refinitiv has developed a suite of secure and bespoke solutions that help central banks in developed, emerging and frontier markets to improve their operational efficiencies and increase market transparency.
From automation of primary market auctions and provision of trading tools for secondary market participants through post-trade processes, market surveillance and analytics, Refinitiv is experienced in providing services to central banks to facilitate the smooth running of financial markets.
Such experience will be of value to central banks as they seek to ensure not only that monetary policy is correctly framed for the issuance of CBDCs, but also that seamless integration with existing infrastructures and processes can take place.
There is no doubt that CBDCs will shortly be a reality.